Pernod Ricard Posts Strong Performance

In the 2nd quarter 2008/09, consolidated sales increased by 14% to € 2,456 million, including 3% organic growth, a 2% negative foreign exchange effect and a 13% positive group structure effect.

16/02/09 Pernod Ricard’s 2008/09 1st half-year consolidated net sales (excluding tax and duties) increased by 13% to € 4,212 million, compared to € 3,713 million in 2007/08 HY1. This growth was due to: strong 5% organic growth, in spite of a more difficult environment in the second quarter, a 4% negative foreign exchange effect, primarily due to the depreciation of the Pound Sterling, Korean Won, Indian Rupee and Australian Dollar and a strong 12% group structure effect, primarily due to the integration of V&S from 23 July.

The 14 strategic brands (excluding Absolut), grew by 1% in volume and 6% in value, thereby reflecting the very positive impact of the move up-market and price increases. The strategic brands that reported the strongest value growth(1) were: Martell (+21%), Jameson (+14%), The Glenlivet (+12%), Havana Club (+11%) and Mumm (+8%). Chivas Regal (+6%) and Ballantine’s (+5%) proved they could perform well, whereas Malibu (+1%), Kahlùa (-7%) and Perrier Jouët (-8%) were adversely affected by market conditions and inventory reductions in the US.

In addition, many other spirit brands confirmed their dynamism, especially Ararat and Olmeca in Eastern Europe, Wyborowa in Poland and Royal Stag, Imperial Blue and Blender’s Pride in India.

Additional sales from the contribution of Vin & Sprit’s portfolio, totalled € 507 million for 5 months and 7 days. The Absolut brand continued its rapid development with a slight decline in the US, but continued strong growth in other markets: Spain, the UK, France, Germany, Poland, Italy, Brazil, Mexico, …

In the 2nd quarter 2008/09, consolidated sales increased by 14% to € 2,456 million, including 3% organic growth, a 2% negative foreign exchange effect and a 13% positive group structure effect.  The fact that strong growth was maintained over this quarter demonstrates the strength and staying power of Pernod Ricard’s portfolio and commercial network. The sharply negative 6% foreign exchange effect of the first quarter was significantly offset by the appreciation of the US dollar and the Chinese Yuan.

Gross margin grew by 18% to € 2,503 million, i.e. 5 bps more than sales, due to the triple impact of a strong 6% organic growth, the integration of Absolut and favourable currency movements. The continuing implementation of the value added strategy, applied to the whole portfolio, as well as the contribution of Absolut, a highly profitable brand, led to a very significant improvement in gross margin ratio, which increased from 57.3% to 59.4% of sales, an increase of 210 bps.

The dynamic sales, strongly progressing profit margins and opportunities for market share gains, led us to continue strong growth in our advertising and promotional expenditure to € 731 million (up 17%). Thus, the advertising and promotion expenditure to sales ratio reached 17.3% over the 2008/09 first half-year, compared to 16.8% over the same period of the previous financial year.

In total, the contribution after advertising and promotional expenditure increased by 18% to € 1,772 million and represented 42.1% of sales, up 160 bps compared to the previous financial year.

Structure costs increased by 7% to € 576 million, which only represents 2% organic growth and shows the disciplined management of these costs in an uncertain environment.  This discipline, combined with the accelerated implementation of synergies related to the acquisition of Vin & Sprit, generated a further reduction in the structure costs / sales ratio to 13.7%, a decrease of 80 bps compared to the previous financial year.

Profit from recurring operations grew by 24% to € 1,196 million.  The operating margin was 28.4%, an improvement of 240 bps compared to the previous financial year.

All regions experienced double-digit growth in profit from recurring operations:

- Remarkable 23% growth in Asia/Rest of World (organic growth of 18%), which was due in particular to vigorous Martell and Ballantine’s sales in China and local brands in India.  - The foreign exchange and group structure effects particularly enhanced the growth of the Americas region, which achieved a spectacular 46% increase.  Sales were in slight decline in the US (-2%(1)), in a more difficult market, adversely affected by inventory reductions by retailers, whereas Latin America had a very good first half-year and the Canadian market grew.
- In Europe, organic growth was generated by Eastern Europe (Russia, Poland, Romania…) with good progress in Germany and Sweden, along with more difficult situations in Spain, the UK and Italy. The contribution of Absolut and Vin & Sprit’s operations in Nordic countries resulted in a sharp overall increase in profit from recurring operations.
- In France, growth from Ballantine’s, Mumm and Clan Campbell’s commercial performance was accelerated by good control of structure costs and foreign exchange movements, especially the depreciation of the Pound Sterling.

Currency movements had a negative impact on sales but positive impact on profitability, primarily due to the depreciation of the currencies of two of our main producing countries: Pound Sterling and Australian Dollar.  Over the 2008/09 first half-year, the foreign exchange effect on profit from recurring operations was positive at € 29 million.
 
Over 5 months and 7 days, Vin & Sprit’s integration added € 164 million to the profit from recurring operations of the first half-year 2008/09, thus strongly contributing to the growth of the Group.              

Net financial expenses from recurring operations totalled € 339 million. Debt-related financial interest totalled € 320 million (i.e. an average interest rate of about 5.2%), finance structuring costs being € 8 million and other financial expenses € 11 million.

Corporate tax on recurring operations was an expense of € 169 million, i.e. a rate of 19.7%, in line with our forecasts.  Lastly, minority interests and other items amounted to a negative € 3 million.

In total, Group share of net profit from recurring operations totalled € 685 million, a 15% increase compared to the first half-year 2007/08.

Other operating income/(expense) was a € 133 million expense, primarily relating to the Vin & Sprit integration, including € 47 million due to the early exit from distribution contracts and € 70 million in integration and acquisition costs.  Non-current financial items were a € 46 million expense and were essentially due to negative foreign exchange effects and the impact of volatility on the time value of interest rate hedges.  Lastly, profit from non-current operations generated a € 109 million tax credit, due to the deduction of non-current expenses and the positive impact of foreign exchange movements (deductible exchange losses).

Consequently, Group net profit totalled € 615 million, a 5% increase compared to the 2007/08 financial year.  The first half-year, featuring strong sales growth, a significant improvement in operating margin and the rapid and successful integration of Vin & Sprit, was outstanding. “Although visibility is limited for the second half of the year, we anticipate that the wines & spirits sector will on the whole continue to show excellent resilience. Our leadership positions should, thanks to the combined strength of our distribution network and our strong brands, enable us to gain market share in many countries, as we did during the first half-year. Third quarter growth (the weakest quarter of the year) will, however, be affected by unfavourable technical effects, which could result in negative organic growth in sales,” the company said.